OGC Op. No. 10-02-05

The Office of General Counsel issued the following opinion on February 12, 2010, representing the position of the New York State Insurance Department.

RE: BOCES wholly-owned insurance broker

Questions Presented:

1) May a not-for-profit corporation be licensed as an insurance broker under N.Y. Ins. Law § 2104 (McKinney 2006)?

2) Under the proposal discussed below, would XYZ, the wholly-owned subsidiary of the BOCES, run afoul of the 10% limitation set forth in Insurance Law § 2104(d)(3)?

3) May XYZ provide the proposed services that are not specified in the insurance policy or contract to BOCES member school districts and other school districts without XYZ, BOCES or the other school districts running afoul of the anti-rebating prohibition set forth in Insurance Law § 4224(c)?

Conclusions:

1) Yes, a not-for profit corporation may be licensed to act as an insurance broker under the New York Insurance Law. However, restrictions regarding such licensure may exist in the Not-For-Profit Corporation Law or in the by-laws of the not-for-profit corporation.

2) No. Under the proposal, XYZ would not run afoul of Insurance Law § 2104(d)(3), provided that XYZ does not receive more than 10% of its aggregate net commissions on the coverage on policies under which BOCES is the group policyholder.

3) Yes. Provided that the services are provided in a fair and nondiscriminatory manner to like insureds or potential insureds, XYZ would not run afoul of the rebating and inducement prohibitions contained in Insurance Law § 4224(c) by providing services not specified in the insurance policy or contract to BOCES member school districts and other school districts, where the services directly relate to the sale or servicing of the insurance policies that XYZ procures for them, or by providing general information about insurance or risk reduction.

Facts:

The inquirer reports that it is legal counsel to Board of Cooperative Educational Services (BOCES), 1 which is a public organization providing educational programs and services to school districts in New York State. One of BOCES’ objectives is to facilitate the sharing of resources by its member school districts in order to control costs and increase operational efficiencies of the school districts. Although member school districts share the costs of providing community services through membership in BOCES, member school districts do not have any ownership interest in BOCES.

The inquirer further reports that in the effort to control administrative costs of school districts, BOCES is proposing to form XYZ, a not-for-profit corporation, which would become licensed as an insurance broker. BOCES would be the sole corporate member of XYZ, which will provide services to school districts intended to improve their operational efficiencies so that they may devote more resources to the provision of educational services to students.

One of XYZ’s corporate purposes will be to provide insurance brokerage and claims administration services for health benefits provided to employees by the member school districts in a manner that reduces insurance costs while improving the quality of school district employee insurance benefits and also improving the dissemination of information to school district employees regarding available insurance benefit products. XYZ will procure group accident and health insurance policies and contracts from insurers and health maintenance organizations (HMOs) covering employees of the member school districts and employees of BOCES. The policyholders of the foregoing group insurance policies and contracts will be the individual member school districts, BOCES and/or a trust whose members would be two or more member school districts. The inquirer further reports that XYZ also will act as insurance broker for other school districts that are not members of BOCES. Membership in BOCES, therefore, will not be a prerequisite to obtaining insurance broker services from XYZ.

In addition, XYZ will facilitate the sharing of resources among school districts who are members of BOCES with regard to the administration of employee health benefits. In connection with this function, XYZ will analyze the best insurance options and present this to the school districts, providing the school districts with more control over their employee health insurance benefits.

The inquirer notes that XYZ will have no employees of its own, but that one or more BOCES employees will serve as officers of XYZ. XYZ will apply to the New York State Insurance Department (the “Department”) for a corporate license to act as an insurance broker, by and through the aforementioned officers as sublicensees. BOCES intends to provide the following services to insured school districts:

Administrative services (e.g. research and analysis of employee benefits) that are directly related to the sale or servicing of the accident and health insurance polices and HMO contracts issued to the school districts; and

Consulting services that are directly related to the sale or servicing of the accident and health insurance polices and HMO contracts issued to the school districts.

The inquirer further reports that XYZ may decide to sponsor health education and wellness programs that will be available to the general public residing in the geographic area of participating member school districts. Participation in such programs will not be limited to those individuals who are covered under the health insurance policies offered to employees of the school districts and BOCES.

The inquirer states that XYZ will not give any of its funds to BOCES that may be left over from its insurance commissions and fees earned on the insurance policies and HMO contracts it obtains for the school districts after providing the aforementioned services.

The inquirer asks whether the proposed program comports with the Insurance Law and regulations promulgated thereunder, as set forth in the three questions noted above. Each of those questions is addressed in turn.

Analysis:

I. Licensure of a Not-for-Profit

The first question raised by the inquirer’s inquiry is whether a not-for-profit corporation may be licensed as an insurance broker.

BOCES seeks to have XYZ, which would be formed by it as its not-for-profit corporation, become licensed in New York State as an insurance broker in accordance with Insurance Law § 2104. BOCES would be the sole corporate member of XYZ.

Insurance Law § 2101(c) is relevant to the inquiry. That statute reads, in relevant part, as follows:

(c) In this article, ‘insurance broker’ mans any person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself, herself or itself or on behalf of any licensed broker,… (Emphasis added.)

Insurance Law § 2104(a)(1) states as follows:

The superintendent may issue an insurance broker’s license to any individual, firm, association or corporation,…

The foregoing statutes plainly contemplate that an insurance broker’s license may be issued under the Insurance Law to any corporation, including a not-for-profit corporation. See Opinion of the Office of General Counsel (“OGC Opinion”) No. 04-11-23 (November 29, 2004).

II. Ownership of the Proposed Insurance Broker

The inquirer next inquires whether the Insurance Law permits the issuance of an insurance broker license to XYZ where XYZ would be a wholly-owned subsidiary of BOCES.

Insurance Law § 2104, which governs the licensing of insurance brokers, is relevant to the question. Insurance Law § 2104(d)(3) reads as follows:

(3) The superintendent may refuse to issue a license or renewal license, as the case may be, to any applicant if he finds that such applicant has been or will be, as aforesaid, receiving any benefit or advantage in violation of section two thousand three hundred twenty-four of this chapter, or if he finds that more than ten percent of the aggregate net commissions, received during the term of the existing license, if any, or to be received during the term of the license applied for, by the applicant, resulted or will result from insurance on the property and risks set forth in subparagraphs (A), (B) and (C) of paragraph one of subsection (i) of section two thousand one hundred three of this article. [Emphasis supplied.]

Insurance Law § 2103(i)(1)(C) is also pertinent, and provides:

(1) …The superintendent may refuse to issue, suspend or revoke a license, as the case may be, to or of any applicant…if he finds that more than ten percent of the aggregate net commissions, received during the twelve month period immediately preceding, if any, or to be received during the ensuing twelve months, by the applicant, resulted or will result from insurance on the property and risks:

* * *

(C) of the shareholders of an applicant corporation and their respective spouses, and of any affiliated and subsidiary corporations of such applicant corporation, and of any subsidiary and affiliated corporations of a corporation owning any interest in such applicant corporation, and of any firm or association and the members thereof and their respective spouses which either individually or collectively own more than fifty percent of the shares of the applicant corporation, and of any corporation of which such firm or association and its members and their respective spouses, either individually or in the aggregate, own more than fifty percent of the shares, and of any affiliated or subsidiary corporation of such corporation. (Emphasis supplied.)

Thus, pursuant to Insurance Law §§ 2103(i)(1)(C) and 2104(d)(3), the Superintendent may refuse to issue an insurance broker license to any applicant if the Superintendent finds that the applicant will receive commissions amounting to more than ten percent of its aggregate net commissions resulting from insurance on the property and risks of the shareholders of the applicant corporation, who individually or collectively own more than 50% of the applicant corporation’s shares.

Since BOCES will own more than 50% of XYZ’s shares—indeed, it will own all the shares—XYZ may not receive more than 10% of its aggregate net commissions from insurance on the property and risks of the BOCES. The group health insurance policies or contracts issued by insurers or HMOs, upon which XYZ will be paid commissions, will be issued to cover the employees of the member school districts and BOCES. Although BOCES itself will not be an insured, Insurance Law §§ 2103 and 2104 apply to the group policyholder. See OGC Op. No. 07-06-15 (June 15, 2007). Here, BOCES is only one of the policyholders under the group accident and health insurance policies.

Thus, provided that XYZ does not receive more than 10% of its aggregate net commissions on the coverage on policies under which BOCES is the group policyholder, XYZ would not run afoul of Insurance Law § 2104(d)(3).

III. Services provided by the Proposed Broker and the Anti-Rebating Law

The inquirer also inquires whether XYZ may provide, and whether BOCES member school districts and other school districts may receive, the benefit of the services proposed that are not specified in the insurance policies or HMO contracts, without running afoul of the rebating prohibition contained in Insurance Law § 4224(c).

That statute prohibits an insurance broker from giving or offering to pay as an inducement or interdependent with any policy of accident and health insurance, or for an insured from receiving, any rebate by giving inducements to purchase insurance, or any valuable consideration not specified in the policy or contract to insureds, and reads as follows:

(c) Except as permitted by section three thousand two hundred thirty-nine of this chapter [allowing insurer-established wellness programs], no such…insurer doing in this state the business of accident and health insurance … and no licensed insurance broker…shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase as such inducement or interdependent with any … policy of accident and health insurance, any stocks, bonds or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate or premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract. (Emphasis added.)

With respect to administrative and consulting services described above, the inquirer states that they all will be directly related to the sale or service of the accident and health policies to be issued under the benefit programs offered by the school districts or will provide general information about insurance or risk reduction. The inquirer further reports that the services will be provided in a fair and nondiscriminatory manner to like insureds or potential insureds.

An insurance producer may provide a service not specified in the insurance policy or contract to an insured without violating the anti-rebating and inducement provisions of the Insurance Law if 1) the service directly relates to the sale or servicing of the policy or provides general information about insurance or risk reduction, and 2) the insurance producer provides the service in a fair and nondiscriminatory manner to like insureds or potential insureds. See Circular Letter No. 9 (2009). Based upon the inquirer’s representations, the services that are proposed to be provided by XYZ to school districts may be lawfully provided without running afoul of the rebating and inducement prohibitions contained in Insurance Law § 4224(c).

Indeed, it is the Department’s understanding that XYZ will not limit the sale of insurance solely to school districts that are members of BOCES. Nor will XYZ give any of its funds to BOCES that may be left over from its insurance commissions and fees earned on the group accident and health insurance policies and HMO contracts it obtains for the school districts after providing the stated services. Thus, the circumstances presented differ markedly from those addressed in the OGC Opinion dated January 6, 2010, which concluded that where an automobile club receives the benefit from dividends paid to the insurance agency that is partially owned by the subsidiary of an automobile club, the arrangement contravenes the anti-rebating prohibition of Insurance Law § 2324, where the insurance is marketed and sold only to automobile club members. Here, by contrast, the marketing and sale of insurance does not constitute a benefit to BOCES, its member school districts, or both of their employees.

With respect to the health education and wellness programs that XYZ may sponsor, the inquirer notes that they will be available not just to member school districts but also to the general public residing in the geographic area of the school districts that elect to participate. Therefore, the proposed service arrangement differs from the situation presented in OGC Opinion No. 08-09-12 (September 26, 2008). There, a bail bond agent proposed to make certain services available only to someone who purchased a bail bond through the agent. The Department concluded that such arrangement would violate Insurance Law § 2324. However, that opinion also noted that, as in the instant situation, if the service is available to everyone, and not tied to the purchase or solicitation of insurance, then it likely does not violate the Insurance Law’s anti-rebating provision.

In sum, the proposed plan as presented would not violate Insurance Law § 4224 because XYZ will make those services, other than the services that are directly related to the group accident and health insurance that it procures to cover employees of BOCES and employees of its member school districts, also available to the general public residing in the geographic area of the school districts that elect to participate in those programs. See OGC Opinion 10-01-03 (January 6, 2010).

For further information, you may contact Principal Attorney Barbara A. Kluger at the New York City Office.

1 Such a board may be established by boards of education and school trustees of a supervisory district that are not part of an intermediate district under N.Y. Education Law § 1950 (McKinney Supp. 2009). The purpose of such a board is to carry out a program of shared educational services in the schools of the supervisory district and for providing instruction in such special subjects as the Commissioner of Education may approve.